Willingness-to-Pay for Energy Conservation and Free-Ridership on Subsidization – Evidence from Germany

Table 3: Marginal WTP in East- and West-Germany

MWTP is depicted in e/kWh, measured in prices of 2000.

MWTP within Germany is essentially a result of the special situation of Eastern
Germany’s building stock, we consider the estimates obtained for western house-
holds to better reflect the prevailing MWTP in the post-unification period.

3.3 Policy Implications

The most recent financial support program of the German government to en-
courage retrofits allows households to not only apply for loans, but also provides
grants for covering renovation expenses. Up to 10% of the investment cost are
awarded, reaching a maximum of e5000 per dwelling. With individual MWTP
estimates for energy savings and the associated investment cost in hand, we can
approximate the share of households that would undertake the retrofit irrespec-
tively of the financial support. Given that these households cannot be identified
by the program authority in advance, they have an incentive to free ride on the
grant.

An immediate challenge in gauging the extent of free-ridership returns us to
the issue of how to account for hidden costs. We define a free-rider as a household
whose individual WTP, calculated as the product of MWTP_i × ∆Q_ij, is greater
than the sum of the observed plus hidden costs incurred from a particular retrofit:

sz
total costij

Although our WTP estimates account for hidden costs via the inclusion of both

latent effects and information cost, drawing definitive conclusions from the above

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